Monthly Archives: April 2012

Accounts on Friday received allocations of the first- and second-lien financing backing Madison Dearborn’s acquisition of Schrader International. The $235 million, six-year first-lien term loan freed to trade at 98.5/99.5, from issuance at 98, sources said. It cleared the market at L+500, with a 1.25% LIBOR floor, and is covered by a 101, one-year soft call premium.

At 98 issuance, the loan yields roughly 6.84% to maturity, which narrows to 6.62% at the midpoint of the bid/ask on the break.

The $100 million, seven-year second-lien term loan broke into a 98.75/99.75 market, from issuance at 97.5, sources added. The second-lien is priced at L+925, with a 1.25% floor; it carries 103, 102, 101 call premiums in years 1-3, respectively. It yields about 11.5% to maturity, or 11.09% at the midpoint of the bid/ask.

As reported, Barclays, Goldman Sachs, and Citi sweetened pricing on the deal as they stripped maintenance covenants from the term loans. The first-lien term loan launched to market with leverage and interest-coverage tests, while the second-lien originally included a leverage test.

Original price talk, meanwhile, was L+450-475, with a 1.25% floor and a 98.5 offer price on the first-lien, and L+850-900, with a 1.25% LIBOR floor and a 98 offer price on the second-lien.

In addition to dropping covenants, the excess-cash-flow-sweep thresholds were been revised; the sweep starts at 50%, falling to 25% at 3.5x and to 0% when leverage is less than 3x. Previously, the respective step-downs occurred at 3.75x and 3x, sources said.

The financing, which also includes a $35 million revolving credit, backs Madison Dearborn’s $505 million purchase of Tomkins Plc’s Schrader subsidiary. Madison Dearborn announced today that the transaction has closed.

Agencies earlier assigned B/B2 ratings to the issuer, while the first-lien debt was rated B/B1 and the second-lien loan was rated B-/Caa1. Pro forma for the transaction, leverage will run about 3.1x through the first-lien debt and 4.4x on a total basis, sources said.

Specifically, it’s an agreement with ESPN Radio that will bring the sports-news programming and advertising network to the FM dial via New York’s 98.7 FM – knocking out the current programming from Kiss FM. Essentially, Emmis is leasing out its channel to ESPN and then leveraging ESPN’s credibility to get a lower cost of capital in a loan agreement with Teachers, sources said.

The promissory note maturing August 2024 carries a rate of 4.1%, according to sources, providing net proceeds of $75 million to pay down debt. The proceeds are enough to pay down the full amount outstanding on the revolver and some of the term loan debt, according to a source.

In 2006, Emmis originally took out a $145 million revolver due November 2012 and a $455 million term loan B due November 2013.

As reported, in March 2011, Emmis extended a portion of its term loan debt to mature November 2014. As of Nov. 30, there was $110.2 million outstanding on the extended debt, which was priced at a minimum of 12.25%, including an option to pay up to 7% of the coupon in kind. The $88.1 million outstanding on the non-extended TL as of Nov. 30 matures in November 2013 with pricing of L+400 pricing. The revolver was indicated today at 93/94.6, while the non-extended term loan debt was indicated at 96.25/97.75, both up three points from Thursday, according to Markit.

Bank of America was the administrative agent on the original loans.

Additionally, Emmis is selling the intellectual-property rights of Kiss FM to YMF Media. The total proceeds from the financing, the payment from the sale of Kiss FM intellectual-property rights, and value Emmis expects to receive from Teachers in the future will be approximately $96 million, according to the announcement.

Emmis CEO Jeff Smulyan said in a statement that with the enhanced financial flexibility the company will aim to enhance service to New York’s urban community at with the Hot97 brand. Emmis has recently sold a controlling interest in three radio stations to Merlin Media and looks to sell KXOS in Los Angeles, Smulyan stated. The Emmis employees affected by today’s announcement will receive “generous severance packages,” according to the release. Emmis purchased Kiss FM 98.7 in 1994.

The bankruptcy court overseeing the Chapter 11 proceedings of Graceway Pharmaceuticals on April 20 confirmed the company’s reorganization plan, according to a court order filed in the case.

As reported, the company’s confirmation hearing got underway on April 11, but was continued to April 23 to give the company an opportunity to resolve its differences with the U.S. Trustee in the case who filed an objection asserting the plan was not confirmable because it provided for, among other things, non-consensual third-party releases.

According to court filings, however, an additional hearing was not necessary because the parties resolved, more or less, all of the issues raised at the April 11 hearing.

Graceway filed a revised confirmation order with the Wilmington, Del., bankruptcy court on April 19, saying it was “supported by the first-lien facility agent and the second-lien facility agent and the United States Trustee does not object to its entry.”

Graceway further said that the creditors’ committee in the case “will not oppose, but does not affirmatively support,” the revised order, adding, “The debtors believe that the revised proposed confirmation order fully resolves all concerns and objections expressed at the April 11 hearing.”

As reported, Graceway filed its proposed liquidation plan on Jan. 25, providing for the distribution of the proceeds of its $445 million sale of the company’s assets to Medicis Pharmaceutical. About $433-446 million in first-lien claims will see a recovery of 96.7-100%. As for second-lien claims, with about $330 million outstanding, the roughly $4.9-6.4 million portion that has been allowed as a secured claim will see a full recovery, while deficiency claims for the remainder of the claim were lumped in with general unsecured claims, which will see a recovery of only 0.9-1.4%. – Alan Zimmerman

Standard and Poor’s Ratings Services today published a study of recovery rates for the European leveraged loan market, which shows strong recoveries for senior debt that are akin to those seen in the U.S. market.

The full report is titled “Europe’s Senior Loan Market Delivers A Strong Recovery Performance Over Its First Cycle”. Subscribers to RatingsDirect can access the research piece at www.globalcreditportal.com. Alternatively, to purchase/access the report, please contact Client Support Europe: +44 20 7176 7176 or [email protected].

The report describes the years between 2002 and 2008 as the first real cycle for Europe’s expanded leveraged finance market. Following rapid growth in the European market – to a €165 billion peak of new issuance in 2007 – the market hit severe turbulence, and the trailing default rate for leveraged companies reached 14.7% in the third quarter of 2009.

In its preliminary study, published today, S&P focuses on 101 known defaults. It reports that recovery rates so far on European first-lien debt have remained strong throughout the cycle, with a mean nominal recovery rate of 76% by value between 2003 and 2010. This is comparable with the U.S. experience between 1987 and 2011, where the mean nominal recovery rate is 83.7%.

However, this European recovery rate must be treated with care, S&P writes, since it includes a high volume (65%) of interim recoveries, mainly debt exchanges. Focusing on ultimate recoveries only the recovery rate is lower, with a mean of 63%.

This difference is attributed to the high percentage of interim recoveries in which debt has been rolled over or extended. As these interim situations are tracked over time, they may eventually recover less when ultimate recoveries are calculated.

The report shows that between 2003 and 2010, more than 120 first-lien debt instruments have an interim recovery rate of 90-100%, but looking at final recoveries, fewer than 20 fall into this category.

S&P holds the view that “the default rate over the past two years was artificially depressed by the accommodating behavior of senior lenders”, who were keen to minimise book losses while capitalising on amendment fees and higher spreads. This could change, however, as regulation and pressure to reduce risk-weighted assets cause banks to take a tougher line on non-core assets and on dealing with loan exposures to over-levered businesses.

Comparing first-lien recovery rates for publicly rated companies and those with credit estimates shows better results for the latter. “Recoveries for publicly rated companies have a mean of 62% and a median of 66%, while those for credit estimates have a mean of 79% and a median of 91%,” S&P says, although it notes that certain large defaults drag down the recoveries for publicly rated companies.

The report also looks into recovery rates in different European countries, and in a point that might surprise market participants, finds that recoveries for jurisdictions that are considered less friendly to secured creditors – namely France and Spain – are as good as, or better than the U.K.

The U.K. shows an average recovery rate of 71.4%, versus 75.8% in France and 89.2% in Spain. The sample size for some countries is relatively small, however, S&P warns.

The sub-debt experience

S&P’s study records very similar recoveries for second-lien and mezzanine debt – mean recoveries for the former are 31%, versus 30% for the latter.

In light of this, S&P suggests that the description of second-lien as “underpriced mezzanine” is more accurate for its sample than describing it as “stretched senior”.

S&P traces 30 second-lien defaults, and based on value, more than 83% of these have a recovery of less than 10%.

The report proposes that one reason second-lien has such low recoveries is because the small size of the tranche means it typically has a binary result: zero or full recovery in case of default. “A small incremental difference in the enterprise value of a company at default can result in a large shift in the value available for a lower-lien debt holder,” the report says.

The mezzanine story is similar – 81% of the 54 tranches captured by S&P’s study recovered less than 10%. A higher proportion of mezzanine tranches enjoyed recoveries in the 90-100% bracket, compared to second-lien, thanks to instruments that had their interest converted to PIK, which the agency counts as a default but an interim full recovery.

However, ultimate recoveries will only become evident over time, in part because of the value of equity given to subordinated lenders. Unless there is evidence to the contrary, S&P initially assigns the equity a zero recovery.

Equity was handed over in 63% of second-lien cases, although almost 70% of these received less than 5% of the total equity in the restructured entity. But in 7% of cases, the second-lien lenders took a much more substantial chunk of equity – more than 40% – and for these lenders there is material upside that will eventually feed into the ultimate recovery.

S&P adds the caveat that its study to date of second-lien may not be representative of the experience of the overall asset class in Europe, since these are the early defaulters.

Lastly, turning to the small number of senior-unsecured instruments within the study – mainly speculative-grade bonds – S&P notes that the mean recovery values are close in line with S&P’s U.S. data. This debt shows a mean recovery of 48% in Europe between 2003 and 2010, compared with 51.8% for the U.S. long-term empirical average.

For more on the U.S. experience, see “Default, Transition, and Recovery: Recovery Study (U.S.): Piecing Together The Performance Of Defaulted Instruments After The Recent Credit Cycle,” published Dec 1, 2011. – Ruth McGavin

Monier, a global leader in clay and concrete tiles for roofing, has announced plans to issue a €250 million offering of seven-year (non-call three) secured bonds via J.P. Morgan (B&D) and Deutsche Bank as global coordinators and BNP Paribas, Morgan Stanley, and UniCredit as joint bookrunners.

A European roadshow is scheduled for April 30 through May 3, with pricing thereafter.

Proceeds will be used to refinance bank debt. Ratings have yet to be confirmed.

As reported earlier this week, Monier received strong support for its amend-to-extend, with lenders holding more than 95% of the senior facilities approving the request.

The company currently has €680 million of debt outstanding under its reinstated senior debt facility due April 2015. This existing debt pays a margin of 25 bps cash and 2% PIK. The margin on the extended debt will rise to E+450, all cash-pay. Monier has also raised a new €150 million, super-senior revolver from a group of banks.

The A-to-E also included a provision to issue a secured bond in order to prepay amounts under the senior debt facilities, that will be weighted to the extended debt. The debt extension request is subject to this prepayment taking place.

Monier generated revenues of €1.392 billion in 2011, to give EBIT of €25.2 million, against revenues of €1.28 billion in 2010 and EBIT of negative €39.1 million. The company has €233.2 million of cash on its balance sheet. – Luke Millar/Ruth McGavin

The average bid of LCD’s European loan flow-name composite rose 49 bps during the week ended April 26, to 95.29% of par (based on Markit pricing). This is the largest single-week gain since the first reading of the year, on Jan. 5. In the year to date, the average bid is up 184 bps.

The average bid was boosted by Avio’s TLB and TLC facilities, which each gained 1.5 points, to 97.49 and 98, respectively. The gains came on the back of the amend-to-extend request issued to the company’s lenders at the beginning of the week, which seeks to push the maturities of the TLB and TLC out to 2017.

LCD’s broad secondary composite, which reflects a wider universe of deals, improved 54 bps this week, to a 33-week high of 85.55. This is the largest weekly gain since the broad secondary composite added 65 bps during the week ended Jan. 12. For the year to date, the broad secondary is now up 358 bps.

Advancers trail decliners

Advancers trailed decliners on a month-on-month basis for the period ended April 26, with four facilities advancing and seven declining. The average increase was 28 bps, while the average decline was 38 bps.

Advancers led decliners over a one-week period, with nine facilities advancing by an average of 62 bps. Two facilities declined, by an average of nine basis points.

In LCD’s broad secondary composite, advancers led decliners on both a monthly and weekly basis.

Bid/ask spread narrows

The average bid/ask spread of the flow names was six basis points tighter than last week’s level, at 117 bps. The current level is 32 bps tighter than the closing level of 2011.

The average bid/ask spread for the broad composite was three basis points narrower than last week’s level, at 209 bps. The average bid/ask spread for the most liquid segment of the broad composite widened by one basis point from last week, to 147 bps. The average bid/ask spread for the least liquid segment of the broad composite was 245 bps, or four basis points tighter than the prior week’s reading.

Discounted spreads narrow

While the average bid climbed this week, the average discounted spread tightened 19 bps from last week, to 549 bps. The average discounted spread has narrowed 76 bps from the beginning of the year.

S&P European Leveraged Loan Index (ELLI)

The ELLI distress ratio – defined as the share of performing loans trading below 80 – was unchanged from last week, at 25%. The current level is down from 32% at the beginning of the year.

Using a start date of Dec. 31, 2003, the Sharpe ratio for the ELLI (based on total return excluding currency) was 0.38, on par with the past four weeks. The Sharpe ratio for the MLEHY was 0.56 this week, unchanged from last week.

U.S./Europe comparison

The average bid of LCD’s U.S. loan flow-name composite gained 19 bps during the week ended April 26, to 98.72% of par. The average bid is now 512 bps above the final reading of 2011. The average bid premium margin narrowed by 30 bps this week in favour of the European flow-name composite. However, the U.S. flow-name composite holds a premium over its European counterpart for a twentieth consecutive week, and 28 of the last 29 weeks. The premium for the U.S. composite over its European counterpart is currently 343 bps.

The average bid/ask spread for the U.S. flow names contracted one basis point, to 34 bps.

While the average bid of the U.S. flow names improved this week, the average discounted spread to maturity tightened six basis points, to L+425. The premium for European flow names over the U.S. composite narrowed 13 bps, to 124 bps.

Bonds backing Nokia are steady at newfound, lower levels today following a second fallen-angel downgrade, as S&P lowered the credit and its unsecured bonds to BB+, from BBB-, after the same move by Fitch earlier this week. With the latest downgrade today, the profile is now BB+/Baa3/BB+ and the company’s bond issues are expected to shift into high-yield indexes, from investment-grade indexes, next month, according to sources.

The company’s two dollar-denominated issues are the $1 billion issue of 5.375% notes due 2019 and the $500 million issue of 6.625% bonds due 2029. Market valuation is roughly 85 and 81, respectively, down from par and 98, respectively, two weeks ago before the disappointing quarterly report, according to S&P Capital IQ.

S&P left the outlook as negative after downgrading the credit. The negative outlook reflects potential for another downgrade if the Finland-based maker of mobile phones fails to stabilize revenues and margins and significantly cut its cash losses, according to S&P. It was a a second downgrade this year, following a cut from BBB in March.

“We now expect Nokia to report significantly lower margins and cash flows in 2012 than we had previously expected,” explained S&P credit analyst Thierry Guermann in the report.

“Nokia reported a 29% quarterly decline in sales and negative margins at its Devices and Services division in the first quarter of 2012, and gave guidance of “similar or below” for the division’s margin in the second quarter,” added Guermann.

Nokia has been making headlines this month as it issued a profit warning at the beginning of April, and announced a €1.34 billion operating loss for the first quarter of 2012. Shares are trading at $3.68 per share on the NYSE, down from $5.47 at the outset of the month and a recent peak at $7.31 in October.

Fitch also lowered the rating to BB+, from BBB-, earlier this week and left the outlook as negative. Fitch also said that Nokia will need to improve its performance in the upcoming quarters in order to avoid further downgrades.

Moody’s on April 16 lowered the credit rating on Nokia to Baa3, from Baa2, and left the outlook as negative. Moody’s admitted that quarterly performance can be volatile, but warned of structural challenges and competition from Chinese carriers. The negative outlook is based on low performance visibility stemming from market pressures as well as the company’s product transition, according to Moody’s. – Matt Fuller

Data from EPFR Global show a $747 million cash inflow to U.S.-domiciled high-yield mutual funds and exchange-traded funds in the week ended April 25, by the weekly reporters only. A two-week inflow streak totaling $1.34 billion has now wiped out the outflow of $1.17 billion three weeks ago, which itself was the first outflow of the year, and, in fact, the first outflow after an 18-week inflow streak totaling $18.9 billion.

The four-week trailing average rises again, to positive $187 million, from positive $147 million last week, and versus negative $292 million the week prior to that. The latter was the first negative reading in the four-week average in 17 weeks.

The influence of ETFs is heavy again in today’s reading, with ETF flow accounting for $386 million, or 52% of the total inflow during the week. Last week it was 49% of the outflow, and it’s averaged 41% of flow per week.

For the year-to-date reading, it’s positive $18.9 billion, by the weekly reporters only. The ETF-only flow accounts for 42% of the sum, or roughly $6.7 billion, according to EPFR.

Market momentum through Wednesday was also positive, and net asset value expanded $751 million. That’s based on $171.9 billion of total assets of the weekly reporter sample, versus $170.5 billion at the end of the prior week, and stripping out the inflow figure. Net assets are up 18% so far this year after the 18% gain in 2011, according to EPFR. – Matt Fuller

Dublin-based shipping company TBS International exited Chapter 11 protection in the U.S. on April 12, according to a court notice filed last week by the company’s lawyers.

The company filed for bankruptcy in White Plains, N.Y., on Feb. 29 with a prepackaged plan and the hope that it would exit Chapter 11 within 60 days. It did so in just 43 days.

At the time of its filing, the company owed Bank of America $125.6 million, DVB Bank $25.9 million, Credit Suisse $18.2 million, and AIG $4.9 million. TBS also owed about $38 million in unsecured trade debt as of Dec. 31, 2011.

The company’s senior lenders agreed to provide $42.8 million in debtor-in-possession financing during its bankruptcy, consisting of two different facilities: the first, for $41.3 million, is provided by Bank of America and DVB Bank, and a second $1.5 million facility is extended by Credit Suisse.

Under its reorganization plan, which U.S. Bankruptcy Judge Robert Drain confirmed on March 29, TBS restructured amounts it owed Bank of America and DVB Bank into a new term loan with two tranches: a $30 million second-lien term loan maturing Sept. 30, 2016, and a $121 million second-lien PIK/toggle term loan maturing June 30, 2017. In addition, BofA and DVB will receive all of the new class A common stock, representing 90% of the equity interests in the reorganized company.

Amounts owed Credit Suisse will be restructured into an $18.2 million term loan with an interest rate of L+300, maturing June 30, 2017. AIG’s claims will be rolled into a $4.9 million term loan maturing 180 days after the plan’s effective date.

Founded in 1993, TBS services key ocean trade routes between Latin America and Japan, between South Korea and China, and ports in North America, Africa, the Caribbean, and the Middle East. But over the past few years, according to an affidavit filed by TBS CFO and Executive Vice President Ferdinand Lepere, the overall slowdown of the global economy, downward pressures on freight rates, increased fuel costs, industry over-capacity, and the lack of liquidity in the credit markets forced the company into restructuring negotiations. TBS emerged from its last Chapter 11 in early 2001. – John Bringardner

Chesapeake Energy shares yesterday gained nearly 2%, to $18.44, and various bonds from the prolific issuer spiked, then retreated, on news that the company is reviewing financing arrangements between the CEO and lenders. As well, the company said it is negotiating with the CEO to terminate early the controversial well-investment agreement, according to a statement.

Chesapeake 6.775% notes due 2019 traded half a point higher, at 98.5, on the news, only to retreat to either side of 98, according to sources and trade data. Likewise, the 6.125% notes due 2021 are now at 94.75/95.75, versus prints at 95.5 yesterday and 95.875 on Wednesday, trade data show.

The Chesapeake board of directors agreed to not renew the Founder Well Participation Program with CEO Aubrey McClendon when the 10-year deal terminates in 2015, and parties are in negotiation about early termination, according to the company statement. As well, McClendon agreed to disclose information regarding his interests in the program and related third-party loans for review by the board of directors.

The FWPP gave McClendon the unique opportunity to invest for a 2.5% interest in each of the company’s oil and gas wells. McClendon reportedly drew $1.1 billion in loans over the past three years to make the investments, according to a Reuters report last week that called it “an unusual corporate perk,” torpedoing bonds in the secondary market. Indeed, the 6.775% notes were in a 99 context prior, while the 6.125% notes were two points higher than current valuation.

The issue raised was that McClendon was using the FWPP investment as collateral on the loans, which raises questions about the value of bondholder collateral, sources said.

In addition to today’s statement about termination of the program and initiation of a review of the financing arrangements, Chesapeake clarified last week’s statement issued by its general counsel. The statement that the board is “fully aware of the existence” of McClendon’s participation in the program was intended to convey that the board is “generally aware,” according to the statement.

“The Board of Directors did not review, approve, or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions,” the statement noted.

Chesapeake bonds have also been under pressure in recent months amid the plunge in natural-gas prices to 10-year lows, with the one-month contracts for delivery at the Henry Hub in Louisiana around $2 per million British thermal units, down from $3 at the beginning of the year and around $4 last fall. The benchmark 6.625% notes, for example, were trading in a 111 context in October, falling to around par earlier this month and yesterday were as low as 97-98, trade data show. – Matt Fuller